EU leaders are not “bluffing” when they say the UK will be left without access to the single market when it leaves the bloc if there is no free movement of people, Malta’s prime minister says.
Theresa May says the UK will begin the legal process to leave the EU by March.
Mr Muscat said talks on the details of a “new relationship” could be delayed.
Much political debate has focused on the possibility of a “soft” Brexit – the UK retaining some form of membership of the single market in exchange for conceding some control over immigration – and “hard Brexit” – leaving the single market but having fuller control over migration.
But Mr Muscat said the UK and EU needed to first reach agreement on a range of other details once Mrs May triggers Article 50 of the Lisbon Treaty.
He said these included the bill the UK must pay before leaving, establishing what will happen to the UK-Republic of Ireland border and working out interim arrangements on issues like security.
Asked about a suggestion from Foreign Secretary Boris Johnson that the UK could in theory stay in single market and place limits on the freedom of movement of EU citizens, Mr Muscat told the BBC “it’s just not happening”.
He added: “All of us have been pretty clear in our approach that we want a fair deal for the UK but that kind of fair deal can’t translate itself into a superior deal.
“I know that there is absolutely no bluffing from the European side, at least in the council meetings I have attended, saying ‘we will start in this position and then we will soften up’.
“No, this is really and truly our position.”
He acknowledged the talks could get “complicated” and amount to a “bit of a Catch 22 – it won’t be a situation when one side gains and the other side loses.
“We are going to lose something but there will not be a situation when the UK has a better deal than it has today”.
Mr Muscat also reiterated the view that even when a final or interim deal is struck between EU leaders and Britain, the European Parliament may decide to veto it in 2019.
His comments come days after the UK’s Brexit Secretary David Davis described his meeting with the European Parliament’s chief negotiator Guy Verhofstadt as a “good start”.
Mr Davis said their pre-negotiations discussion had been able to cover structures and how both sides propose to approach the Brexit talks, adding a deal was possible that was in the interests of the EU and the UK.
The UK government has said it does not want to reveal its negotiating hand on Brexit before the talks take place.